The Starship Enterprise Zones

Banfield Pet Hospital pocketed a subsidy and got favorable treatment from local governments—then bolted to Vancouver.FOR SALE OR RENT: Employees at the Banfield Pet Hospital headquarters at 8000 NE Tillamook St. will relocate to Vancouver, Wash., where Banfield's CEO and 30 percent of staff live.

The Banfield chain started in Portland, and nine years ago the company built a $25 million headquarters in Northeast Portland, after local governments gave the company more than $1.43 million in taxpayer subsidies and millions more in a favorable land deal.

"Stay" is a relative term in the arena of government economic incentives.

Those subsidies have run dry, and Banfield Pet Hospital—bought in 2007 by Mars Inc., with its estimated $30 billion in annual sales—is leaving the city and moving across the Columbia River to Vancouver.

The case of Banfield Pet Hospital underscores the tradeoffs, and risks, when local governments essentially pay companies to locate here.

Tony Rufolo, an emeritus professor of economics at Portland State University, has studied enterprise zones and other corporate tax incentives. He says policymakers should ask two questions about tax incentives: Would the company have made the investment regardless and are there long-term benefits?

The story starts back in 2003, when Banfield, then owned by Dr. Scott Campbell, an Oregon veterinarian, began looking for more space for its headquarters.

Meanwhile, Portland Public Schools was trying to unload surplus real estate, including an alternative school called Vocational Village where students took shop classes and other types of hands-on instruction.

County property records show the 5.3-acre site at Northeast 80th Avenue and Tillamook Street was valued at $4.7 million. But PPS was at the time desperate to plug holes in its budget. The district said it had the property appraised at $2.1 million, and then sold it to Banfield for $2.3 million.

The Portland City Council was under pressure to be more business-friendly, after seeing Louisiana-Pacific Corp., a building materials manufacturer, move to Nashville, Tenn., and Columbia Sportswear move its headquarters to Washington County.

Not only did the City Council unanimously approve Banfield's request for necessary zoning changes, the city also made sure Banfield could take advantage of one of the city's enterprise zones.

Enterprise zones are designed to induce companies to invest in economically struggling areas by waiving property taxes. Like most tax breaks, enterprise zones are controversial. In 2006, the nonpartisan Legislative Fiscal Office produced a report raising questions about the effects of enterprise zones. And in 2010, Rufolo and two colleagues wrote a report that said the cost per job produced by enterprise zones was high and "there appears to be no overall effect on economic growth."

Banfield was fortunate to get its tax break in the first place, persuading the Portland Development Commission to stretch the boundaries of the North/Northeast Enterprise Zone to include its new property.

Banfield's tax benefit—valued at $1.43 million—all but expired in 2012, and last year the company, which had grown from 350 to 500 employees in Portland, started looking for a new headquarters location. The PDC offered locations in Lents, Gateway and Cascade Station near Portland International Airport. The agency even offered a new enterprise-zone tax break, city-subidized loans and workforce training. It wasn't enough.

"I think we were competitive on cost," PDC economic development director Chris Harder says. "But we were told they wanted a more suburban environment."

Banfield officials declined to answer questions. "This [Vancouver] site best met our long-term growth, business and cultural needs," the company said in a statement.

State Rep. Jules Bailey (D-Portland), who serves as co-vice chair of the Joint Committee on Tax Credits, has studied enterprise zones in his economic consulting work. Bailey—who's running for Multnomah County commissioner—says politicians need to be careful not to get manipulated and should consider inserting "claw-back" language in tax-break agreements.

"The point of an enterprise zone is, we are forgoing revenue now in the expectation that there will be job gains for underserved communities," Bailey says. "We're making an investment expecting a return. If we don't get that return, it's fair to ask if we should get our investment back.â